Fixed installment methodis also know asstraight line methodororiginal cost method.

Under this method the expected life of the asset or the period during which a particular asset willrender serviceis the calculated. Read more

Formula:
The following formula or equation is used to calculate depreciation under this method: Annual Depreciation = [(Cost of Assets - Scrap Value)/Estimated Life of Machinery]

Example: On 1st January 1991 X purchased a machinery for $21,000. The estimated life of the machine is 10 years. After it its break up value will be $1,000 only. Calculate the amount of annual depreciation according to fixed installment method (straight line method or original cost method) and prepare the machinery account for the first three years.
Machinery Account Debit Side $ 1991 Jan. 1 To Bank account 21,000 1991 Dec. 31 1991 Dec. 31 By Depreciation account By Balance c/d Credit Side $ 2,000 19,000 21,000 1991 Dec. 31 1991 Dec. 31 By Depreciation account 2,000 17,000 15,000 1991 Dec. 31 1991 Dec. 31 By Depreciation account By Balance c/d 2,000 15,000

21,000 1992 Jan. 1 To Balance b/d 19,000

15,000 1993 Jan. 1 To Balance b/d 17,000

17,000

17,000

Definition and Explanation:

Diminishingbalancemethodis also known aswritten down value methodorreducing installment method. Under this method the asset isdepreciatedat fixed percentagecalculatedon the debitbalanceof the asset which isdiminishedyear after year on account of depreciation

Example:

On 1st January, 1994, a merchant purchased plant and machinery costing $25,000. It has been decided to depreciate it at the rate if 20 percent p.a. on the diminishingbalancemethod (written down value method). Show the plant and machinery account in the first three years.
Plant and Machinery Account Debit Side Date 1994 Jan. 1 $ To Cash 25,000 Credit Side Date 1994 By Depreciation Dec. 31 " By Balancec/d $ 5,000* 20,000 25,000 1995 By Depreciation Dec. 31 " By Balancec/d 4,000** 16,000 20,000 1996 By Depreciation Dec. 31 By Balancec/d 3,200*** 12,800 16,000

25,000 1995 Jan. 1 ToBalanceb/d 20,000

20,000 1996 Jan. 1 ToBalanceb/d 16,000

16,000

Formula or equation for the depreciation calculation may be written as follows:

*First year: 25,000 20% = 5000 **Second Year: (25000 - 5000) 20% = 4,000 ***Third Year: [25000 - (5,000 + 4,000)] 20% = 3,200
1. What is annuitymethod of depreciation?Where is itadopted?

According to this method, the purchase of the asset concerned is considered aninvestment of capital, earning interest at certain rate. The cost of the asset and also interest thereon are written down annually by equalinstallmentsuntil the book value of the asset is reduced to nil or its bread up value at the end of its effective life. The annual charge to be made by way of depreciation is found out fromannuitytables. The annual charge for depreciation will be credited to asset account and debited to depreciation account, while the interest will be debited to asset account and credited tointerest account.
Journal Entries: Underannuitymethod, journal entries have to be made in respect of interest and depreciation. As regards interest, it has to be calculated on the debit balance of the asset account at the commencement of the period, at the given rate. The entry that is passed: 1. Asset account ToInterest account (Being interest on capital sunk in asset)

With regard to depreciation the amount found out fromthe depreciationannuity table, the following entry is passed: 2. Depreciation account To Asset account (Being the depreciationof asset)

It should be remembered that the interest is charged on the diminishing balance of the asset account, the amount of interest goes on declining year after year. But the amount of depreciation remains the same during the life time of the asset. Example: A firm purchased a 5 years' lease for $40,000 on first January. It decides towrite offdepreciation onthe annuitymethod. Presuming therate of interestto be 5% per annum. Show the lease account for the first 3 years. Calculations are to be made to the nearest dollar.

Annuity Table Amount required towrite off$1 bythe annuitymethod. Years 3 4 5 6 7 8 Solution: According to the annuity table given above, the annual charge for depreciation reckoning interest at 5 percent p.a. would be: 23097540,000 = $9,239 Lease Account Debit Side Date 1st Year Jan. 1 To Cash Dec. 31 To Interest Credit Side $ Date 1st Year 40,000 2,000 42,000 2nd Year Jan. 1 To Balance b/d Dec. 31 To Interest 2nd Year Dec. 31 By Depreciation By Balance c/d Dec. 31 By Depreciation By Balance c/d 9,239 32,761 42,000 $ 3% 0.353530 0.269027 0.218355 0.184598 0.160506 0.142456 3.5% 0.359634 0.272251 0.221418 0.187668 0.163544 0.145477 4% 0.360349 0.275490 0.224627 0.190762 0.166610 0.148528 4.5% 0.363773 0.278744 0.227792 0.193878 0.169701 0.151610 5% 0.367209 0.282012 0.230975 0.197017 0.172820 0.154722

32,761 1,638 34,399

9,239 25,160 34,399

3rd Year Jan. 1 To Balance b/d Dec. 31 To Interest

25,160 1,258 26,418

Dec. 31 By Depreciation By Balance c/d

9,239 17,179 26,418

3rd Year Jan. 1 To Balance b/d

17,170

Sum of the Years' Digits Method of Depreciation:

Sum of the Years' Digits Method an accelerated method of depreciation which is also based on the assumption that the loss in the value of the fixed asset will be greater during the earlier years and will go on decreasing gradually with the decrease in the life of such asset.

SYD=n(n+1)/2

Example:
ABC Ltd. purchased a truck for $65,000 on 1st January 1991. The expected life was 5 years and salvage value $5,000. Calculate the annualdepreciation expenseby applying sum-of-the-years' digits (SYD) method. Solution: Amount to be written of = $65,000 - 5,000 = 60,000 SYD = 1 + 2 + 3 + 4 + 5 = 15 The annual depreciation is: First year depreciation Second year depreciation = = 5/15 4/15 3/15 2/15 1/15 60,000 60,000 60,000 60,000 60,000 = = = = = 20,000 16,000 12,000 8,000 4,000

Third year depreciation = Fourth year depreciation Fifth year depreciation = =

Total

60,000

Depletion method of depreciation is especially suited to mines, quarries, sand pits, etc. According to it the cost of the asset is divided by the total workable deposits. In this way, rate of depreciation per unit of output is ascertained. Depreciation in any particular year is charged on the basis of the output during that year. Example: A mine was acquired at a cost of $20,00,000 the quantity of minerals expected to be mined is 5,00,000 tons, the rate of depreciation per unit will be $4 i.e., (20,00,000 / 5,00,000). If during the year 25,000 tons minerals is extracted, the amount of depreciation will be 25,000 4 = $1,00,000.